An Airline Merger that Might Not Get Off the Ground
12:00 AM, Aug 17, 2013 • By IRWIN M. STELZER
The antitrust lawyers I have served as a consultant often have the same complaint: Their clients don’t know when to shut up. This was certainly true of the executives of US Airways and American Airlines as they touted the virtues of their proposed $11 billion merger. US Airways president Scott Kirby reportedly said consolidation allows airlines to raise fees and charge for baggage, and the company’s CEO, Doug Parker spoke of the virtues of “rationalization,” which antitrust enforcers have always taken to mean higher prices and consumer harm. Now that the Justice Department has decided to sue to stop the merger, the airlines’ lawyers say these comments are taken out of context.
Forgotten by most observers is that American was practically forced into this merger by its much smaller prospective partner. US Airways, which in 2005 acquired America West without objection from the Justice Department, found American, which had previously acquired TWA, unreceptive to its overtures. The larger carrier painted a picture of its glorious future as a stand-alone airline once it emerged from bankruptcy. But US Air lobbied the unions and American’s creditors, painting an even more glorious picture of the virtues of a combined operation that would have 6,700 daily flights to 336 locations in 56 countries, making it by some measures the biggest airline in the world. Earnings would be stabilized. The airlines’ over 100,000 employees would have greater job security and higher wages, a plus for the trade unions. American’s creditors would be better off. Profits would rise. Passengers would get an improved network with more options and better connections. And US Air would drop out of the Star Alliance and join American in British Airway’s One World group, strengthening the attractiveness of BA’s frequent-flier program.
Unfortunately for the prospective partners, they have two hurdles to jump. The first is the series of consolidations that preceded their proposed merger. While the Antitrust Division of the Department of Justice played Rip Van Winkle to the airline industry’s consolidation movement, carrier after carrier disappeared. The US Air-American merger would result in an industry dominated by four airlines—the merged American/US Air, United/Continental, Delta/Northwest, and Southwest/AirTran would have 85 percent of domestic seats, according to researchers at Innovata LLC. Aroused from its slumber, Justice is emulating Robert Durán, the boxer who famously turned to the referee during his battle with Sugar Ray Leonard, and cried No Más. In this case, no more consolidation, at last doing what those of us who were involved in airline deregulation thought it would do: preserve competition so that regulation would be unnecessary. That was the hope of Alfred Kahn, the so-called father of deregulation, when he turned off the lights at the Civil Aeronautics Board and left it to the market to protect consumers and drive the airlines to improve service and efficiency.
For a while it looked as if Kahn had won his bet: Consumers for whom air travel had been out of reach found they could afford to vacation in Florida, or visit grandma in Los Angeles. Then the mergers started, creating the second hurdle for American and US Air: Facts. Scott McCartney of the Wall Street Journal reports “some big-city routes saw price increases of 40% to 50% or more after mergers reduced competition.” Fares on the Chicago-Houston route are up 57 percent from levels that prevailed before United and Continental merged, and United’s domestic fares are up 16 percent, says McCartney. More facts: The prospective partners, says the Justice Department complaint, compete directly on more than 1,000 routes and between them control 69 percent of the slots and 63 percent of the nonstop routes out of Washington’s Reagan National Airport. And the merged carrier would have less reason to maintain its low-fare Advantage Fares program that Delta finds itself forced to meet.
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